IT Outsourcing: 7 Tips for Peace, Profit and Productivity

Outsourcing researchers have gathered practical tips for more productive, profitable and peaceful outsourcing relationships between customers and IT services providers from the work of economist and Nobel Prize winner Dr. Oliver Williamson.

By Stephanie Overby
Fri, June 25, 2010

CIO — Dr. Oliver Williamson may not be a household name in IT outsourcing circles, but a consortium of academics is hoping to change that. Williamson, professor emeritus of business, economics and law at the University of California-Berkeley, won the Nobel Prize in Economics in 2009 for his examination of economic governance. Some outsourcing researchers say his lifelong study of transactional cost economics—the practice of accounting for the total costs of a contract, both obvious and hidden—contains valuable lessons for anyone engaging in outsourcing today.

Kate Vitasek, a faculty member in the University of Tennessee's Center for Executive Education and author of Vested Outsourcing: Five Rules That Will Transform Outsourcing, along with three other academics culled Williamson's work for lessons on improving performance, reducing costs and increasing satisfaction when outsourcing. (The full white paper is available for download. Registration is required.) Here are seven of their suggestions.

1. Build cooperation into the contract.

In an article on transaction cost economics and outsourcing management, Williamson wrote that "efficiency gains from trade go back to when our ancestors traded nuts for berries on the edge of the forest, [in] which exchanges were both transparent and simple."

Modern outsourcing relationships, by contrast, are manifestly more complex. But Williamson maintains that additional gains can be realized if the outsourcing customer and supplier create processes to preserve cooperation throughout the life of the deal. For example, outsourcing partners should ask, "What's in it for we?" instead of "What's in it for me?" says Vitasek. "Don't just say 'win-win'. Contract for a 'win-win'."

2. Factor in hidden transaction costs.

No outsourced project ever costs what it purports to in the contract. In fact, the dotted line and the bottom line can be pretty far apart. Figuring out what an outsourcing deal will actually cost in the long run is tricky, but crucial.

"Every contract structure and relationship, especially in a vested, collaborative partnership, should account for risk, asset specificity, frequency and work to be done," Vitasek says, "or else it's not much of a contract."

One-sided contracts that push all the risk on either the service provider or the customer will cost more in the long run.

3. Use the contract as a framework, not a weapon.

Outsourcing customers—particularly those who've been burned before—may be tempted to create an overly detailed contract to cover every possible contingency. That's a mistake, according to Vitasek's interpretation of Williamson, not to mention impossible.

"It limits innovation and encourages finger-pointing when there is inevitable scope creep and changes," Vitasek says. "Instead of trying to guess about the future, it is better to indicate an outline of the work to be done and provide recourse for ultimate appeal. For work yet to be determined, focus on the process and tools to be used, not on the work to be done."

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